Maryland’s highest court adopts pro rata allocation for asbestos-related bodily injury claims under liability policies. The court began by explaining that injury spanning many years often implicates multiple policies and therefore implicates a continuous or injury-in-fact trigger under Maryland law. Adopting the reasoning of Mayor & City Council of Baltimore v. Utica Mutual Insurance Company, 802 A.2d 1070 (Md. Ct. Spec. App. 2002), app. dismissed, 821 A.2d 369 (Md. 2003), it rejected joint and several allocation because of its “poor fit” under the language of CGL policies, while finding pro rata allocation “unmistakably consistent with the language of standard CGL policies.” The court further emphasized that the pro rata approach serves important public policy objectives because of its ease of administration, efficiency and consistency with the parties’ reasonable expectations, and agreed that, unlike the equitable result under pro rata allocation, the joint and several approach creates a “false equivalence” between an insured who purchased coverage continuously for many years and an insured who purchased just one year of coverage. It also held that an insured who decides not to purchase (as opposed to being unable to purchase) insurance for a certain period will be liable for a prorated share corresponding to that period.
Video of the argument is available here.
Ohio Supreme Court, answering a certified question, declines to adopt a bright-line rule on whether the state’s “all sums” allocation jurisprudence applies to liability policies with “those sums” language. The court acknowledged that “‘those sums’ may indicate a subset of ‘all sums,’” but declined to engage in a “hypertechnical grammar analysis to determine whether the phrase ‘those sums’ is always more limited than ‘all sums’ and would always lead to a different allocation” and stated that, instead, the meaning of “those sums” depends on “the context of each policy and each case.” Under the factual circumstances, it found that joint and several liability was inappropriate because, although the policyholder’s allegedly defective resin products had been sold for several years, the timing of the damage was known or knowable, in contrast to environmental property damage and asbestos bodily injury cases involving continuous, progressive and indivisible harm.
California Supreme Court unanimously adopts “vertical exhaustion,” allowing a policyholder to access available coverage under any excess liability policy once it has exhausted directly underlying policies for the same policy period. In reaching this result, the court rejected the “horizontal exhaustion” rule, which would allow the policyholder to access an excess policy only after it had exhausted policies with lower attachment points in every policy period in which the environmental damage resulting in liability occurred. It found that the plain language of the policies’ “other insurance” clauses was inadequate to resolve the dispute in the insurers’ favor, and that such clauses historically were intended to prevent multiple recoveries when more than one policy provided coverage for a particular loss, rather than “dictating a particular exhaustion rule for policyholders seeking to access successive excess insurance policies in cases of long-tail injury.” It further noted that other policy provisions, such as attachment points expressed only in terms of the immediately underlying insurance, “strongly suggest that the exhaustion requirements were meant to apply to directly underlying insurance and not to insurance purchased in other periods.” The court concluded that, “in the absence of any more persuasive indication that the parties intended otherwise,” the policies were “most naturally read” to mean the policyholder “may access its excess insurance whenever it has exhausted the other directly underlying excess insurance policies that were purchased for the same policy period.”
INSURERS – DIRECT CLAIMS
Montana Supreme Court holds that ex-employees may pursue asbestos personal injury claims directly against their employer’s former workers compensation insurer. Relying extensively on the Restatement (Second) of Torts, the court concluded that the insurer had assumed an independent, common law duty to use reasonable care to warn W.R. Grace’s Libby, Montana employees about the known risk of asbestos exposure in the workplace. The court cited record evidence that: (1) the insurer had essentially undertaken the role of industrial hygienist for the involved plant workers, which included drafting a Safety Program that covered dust control and prevention measures, medical monitoring and evaluation of worker lung conditions, and development and implementation of workplace safety measures for the employees; and (2) the employer had come to rely on the insurer to provide worker-specific medical evaluations and recommendations as a component of its workplace safety and risk management efforts.
Ninth Circuit holds that, under California law, a liability insurer was allowed to intervene in an underlying lawsuit to defend a suspended corporate insured and, having settled the claim, could seek equitable contribution from a nonparticipating co-insurer upon showing a potential for coverage. The court reasoned that, although the statute under which the insured’s corporate status had been suspended imposes criminal liability on persons who attempt to exercise rights of suspended corporations,* the statute expressly exempts insurers who provide a defense for such a corporation.** It further explained that California law recognizes a right to equitable contribution when two or more insurers owe a duty to defend or indemnify the same insured, and permits a settling coinsurer to recover equitable contribution from a nonparticipating coinsurer if the settling coinsurer demonstrates a potential for coverage (i.e., makes a “prima facie showing of potential liability triggering a duty to defend”).
* The insured’s corporate status was suspended, in part, under Section 23301 of the California Revenue and Tax Code. Section 19719(a) of the Code imposes criminal liability on “[a]ny person who attempts or purports to exercise the powers, rights, and privileges of a corporation that has been suspended pursuant to Section 23301.”
** Section 19719(b) of the Code states: “This section shall not apply to any insurer, or to counsel retained by an insurer on behalf of the suspended corporation, who provides a defense for a suspended corporation in a civil action based upon a claim for personal injury, property damage, or economic losses against the suspended corporation, and, in conjunction with this defense, prosecutes subrogation, contribution, or indemnity rights against persons or entities in the name of the suspended corporation.” Section 19719(c) states: “Nothing in this section shall create or limit any obligation upon an insurer to defend a suspended corporation.”
Pennsylvania Supreme Court, in a 4-3 decision, holds that the claimed unintentional shooting of a third party during an insured’s planned murder-suicide alleged a potentially covered “occurrence” and gave rise to a duty to defend on the part of a homeowners insurer.* The majority reasoned that, “when taken as true and liberally construed,” the allegations within the “four corners” of the complaint, which included that the claimant had been shot after the insured “negligently, carelessly and recklessly caused” the gun to be fired, made out an accidental shooting. It explained that these allegations “are not mere ‘artful’ pleading designed to present intentional acts as accidental for purposes of insurance coverage,” but, instead, “present a factual scenario that potentially comes within the definition of a covered ‘occurrence,’ and to which the. . .exclusion for bodily injury ‘expected or intended’ by the insured does not apply.” The majority rejected the insurer’s argument that finding a duty to defend in this context “ignores the basic principle that ‘fortuity’ is essential to a valid transfer of risk between an insured and insurer,” and concluded that “[d]enying a duty to defend under such circumstances would not serve as a crime deterrent, and would unnecessarily withhold compensation to tort victims.”
In the dissenting justices’ opinion, the discharge of the firearm under the circumstances alleged did not “carry with it the degree of fortuity or unexpectedness necessary to constitute an accidental occurrence,” and the majority’s reasoning ran contrary to the principle that “the legal characterizations of conduct in a complaint are not determinative, and cannot be employed to compel an insurer to defend where the factual allegations otherwise would not trigger coverage.”
* The homeowners policy defined “occurrence” as “an accident, including continuous or repeated exposure to the same general harmful conditions.” A personal catastrophe policy also at issue defined “occurrence” as “an accident, including continuous or repeated exposure to conditions, which results in personal injury or property damage which is neither expected nor intended.” Both policies excluded coverage for “bodily injury. . .expected or intended by anyone we protect.”
RESERVATION OF RIGHTS
Pennsylvania appeals court, in a 2-1 decision, holds that a defending insurer was estopped from disclaiming coverage based on an exclusion not cited in its initial reservation of rights (ROR). Citing Brugnoli v. United National Insurance Company, 426 A.2d 164 (Pa. Super. Ct. 1981) (ROR sent within one week of service of complaint was “timely”), the majority reasoned that an insurer can undertake an insured’s defense and still preserve coverage defenses through a timely ROR that “fairly informs” the insured of the insurer’s position. From Brugnoli, the court “extrapolate[d]. . .the general principle that a reservation of rights letter sent close-in-time to the institution of a potentially covered legal action is ‘timely’ under Pennsylvania law.” It found the ROR at issue was timely and may have sufficiently apprised the insured that future exigencies could affect coverage, but it failed to notify (and thus did not “fairly inform”) the insured about an “existing coverage issue appearing on the face of the Policy”––i.e., the potential applicability of an exclusion ––that the insurer raised for the first time eighteen months later. According to the majority, an ROR need not list “every potential defense,” but the “small body” of recent Pennsylvania case law addressing the issue “suggests that some level of specificity is necessary.” In its view, by “fail[ing] to conduct an adequate investigation following the submission of [the] claim” and relying on “boilerplate language” in its ROR, the insurer “obfuscated [its] absolute defense to coverage” and led the insured to believe “there was no pressing need to secure back-up counsel.” Relying on Erie Insurance Exchange v. Lobenthal, 114 A.3d 832 (Pa. Super. Ct. 2015), the majority found the insured had been “presumptive[ly] prejudice[d]” and the insurer, therefore, was estopped from asserting the exclusion.
The dissent disagreed that prejudice was properly presumed based on Lobenthal because the insurer in that case failed to address its ROR specifically to the insured or to name her in it. “In the instant case, [the insured] has not claimed lost evidence or witnesses, or that it would have handled its defense differently. Rather, all the record indicates is that [the insurer] provided free legal representation to [the insured] for 18 months. That does not establish prejudice,” the dissent said.
UPDATE: DUTY TO DEFEND – TEXAS
Our March 2020 issue reported on Richards v. State Farm Lloyds, 2020 Tex. LEXIS 236 (Tex. Mar. 20, 2020), which reaffirmed Texas’ adherence to the “eight corners” rule in determining a liability insurer’s duty to defend. The state’s high court has since adopted an exception to the rule in cases of collusive fraud. Loya Insurance Company v. Avalos, 2020 Tex. LEXIS 373 (Tex. May 1, 2020) authorizes Texas courts to “consider extrinsic evidence regarding whether the insured and a third party suing the insured colluded to make false representations of fact in that suit for the purpose of securing a defense and coverage where they would not otherwise exist.” An insurer owes no duty to defend if it “conclusively proves such collusive fraud.”
Video of the argument in Loya is available here.